What to Do With That Extra Cash in Your Checking Account

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published 12 March 2023

Many people are wary to invest, but if you have extra cash sitting around, you can still make it work for you.

When It Comes to Cash Yields, Cash Is No Longer Trash

In the latest Quarterly Market Perceptions Study from Allianz Life, just 19% of Americans said they are comfortable with current market conditions and ready to invest now. That is down from 26% last quarter and 29% at this time last year.

What’s more, 64% said they would rather have their money sit in cash than endure market swings.

This feeling is likely driven by worry about market volatility and the risk of a recession. The majority of Americans (77%) said they think the market will continue to be very volatile in 2023. And 62% said they worry a major recession is right around the corner.

Listen, don’t have your money just sit in cash on the sideline not working for you. Instead, consider making decisions that can set you up for a more secure financial future. Financial consultants recommend that you have up to three months’ worth of expenses in cash set aside as an emergency fund — this is likely sound advice and not the cash we’re discussing here.

The risks posed by inflation or a prolonged market downturn are real. And for people approaching or in retirement, the tolerance for risk is likely lower than those who have years ahead to rebuild their portfolio if a recession hits. But, leaving money in cash doesn’t address one of Americans’ largest concerns these days — inflation. With today’s inflation, you are likely losing purchasing power letting your money sit in an everyday checking account.

Here are three things to consider doing with your money instead.

1. Pay Off High-Interest Debt.

Investing inherently has risk. And maybe these days, your tolerance for new risk is zero.

Cash that is sitting in a checking account could be used to pay off high-interest debt. That way, you’re still bettering your financial future without taking on new risk. By proactively paying off high-interest debt, you will reduce the amount you will pay in the long run.

High-interest debt is usually considered anything with a higher rate than a mortgage or federal student loan. So, credit cards with interest rates around 15% or a private student loan with a 12% interest rate would both be considered high-interest debt. Paying off a credit card with a high interest rate will reduce the total amount you will pay over time by avoiding future interest.

2. Limit Your Exposure to Market Risk.

You might be thinking that you’ll invest that cash at a later date. Maybe when you think the market has bottomed out, or the volatility has subsided. This might be a bad idea — trying to time the market has historically been a failure. The bulk of gains made during a market recovery will happen on just a few trading days at the beginning of the recovery. That means, if you time it wrong and miss those days, you will be behind.

You can take part in the market and limit your exposure to risk. You can invest in stocks that are less volatile than the market as a whole or choose stocks that historically pay dividends. An emerging investment category — exchange-traded funds (ETFs) — represent a basket of securities and are traded like stocks on stock exchanges, most with relatively low fees. There are different kinds of ETFs that have different benefits. If lowering exposure to market risk is a top concern, a buffered ETF may be a good option. Those ETFs can help manage downside exposure.

3. Invest in Your Future.

Determining your financial goals will help figure out how that money in cash could help you achieve them.

Maybe you have some shorter-term goals, like saving for a down payment on a house. If you’re thinking that purchase will happen soon, keeping money in cash may make sense. For goals further in the future, investing at least a portion of your excess cash in some growth opportunities may be wise so you have more invested in the future.

Saving for retirement is a lifelong goal. If your cash reserve is growing every month, you might want to take a look at increasing your 401(k) contribution. If your employer offers a match on your contributions, make sure you take full advantage of that benefit — it’s like getting free money. You don’t want to pass up on any free money, do you?

If you have an IRA that was funded with rollovers from previous employer plans, you may want to talk to a financial professional about ways to invest for growth and protection. Depending on how close you are to retirement, investing in a fixed index annuity (FIA) with principal protection may be an option, or if you want more growth with a level of protection, a buffered registered index linked annuity (RILA) may be able to offer you the protection you desire with the future growth you may need.

Personalized Investing Portfolios: Unlock the Greatest Potential

In the end, you want your money to be working for you and toward your financial future. Letting money sit in cash with today’s interest rates is likely losing purchasing power. Make sure that even in this volatile market, you make financial decisions on behalf of your future self.

Allianz Life conducted an online survey, the 2022 Q4 Quarterly Market Perceptions Study in December 2022 with a nationally representative sample of 1,005 Respondents age 18+.

Investment involves risk including possible loss of principal. There is no guarantee the ETF funds will achieve their investment objectives and may not be suitable for all investors. Investors should consider the investment objectives, risks, charges, and expenses carefully before investing.

Annuity protection benefits are backed by the financial strength and claims-paying ability of the issuing insurance company.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.